Best-laid plans

For many of us, even the best of budgeting intentions won't ensure success

SAN FRANCISCO (MarketWatch) -- The maelstrom sweeping through the U.S. economy has had one positive effect: More people are taking a hard look at their finances -- working to pay down debt, cut back expenses and shore up their savings.

But even with the best of intentions and the firmest of New Year's resolutions, plenty of people won't stick to their plans.

One common reason: Our underlying relationship with money often gets in the way. Rick Kahler, a certified financial planner and author in Rapid City, S.D., says he often brings in a psychologist or family therapist to help his clients understand what he calls their "money scripts" -- beliefs about money formed in early childhood that guide each of us as adults. Those beliefs can derail our best-laid plans.

Know yourself

Kahler described one client whose father traveled a lot when she was a child. Before his trips, her dad would hand her a credit card and tell her to "buy something nice" for herself. She now realizes she's deep into credit-card debt because she overspends when she's sad or lonely.

Another client believed the one thing with lasting value she could give her children was a private-school education. But the cost of school for her three kids was decimating her and her husband's retirement savings.

If you have trouble sticking to a budget, it's time to rethink your money scripts. For starters, Kahler said, answer the question, "What do I believe about money and --?" Fill in the blank with different words, such as "work," "marriage," "the stock market." Write without censoring yourself, and ask a few friends to do the same.

Then meet with your friends and read aloud a few of your most deeply held money truths. Let your friends comment. They'll have different ideas about money, and the discussion can help you uncover what's driving your spending habits. (It's better to do this with friends rather than spouses.)

When Kahler's client said a private-school education was the one lasting thing she could give her kids, others noted that love, and memories of family trips also can't be taken away, and that an education can lose value if the skills learned become obsolete.

"You've got to get the feedback from other people," Kahler said. "It's really important that we work on our money scripts. A lot of us need to be living a reduced lifestyle...but if your money script says, for instance, that you're a failure if you shop at Wal-Mart, [that] will keep you locked into continuing to borrow to support your lifestyle."

Get real

Another reason people fail to stick to their budgeting plans: They go about it in the wrong way, focusing first on monthly fixed expenses, then lifestyle costs such as clothing and entertainment.

All cars break down. Car maintenance and repairs fall under the category of occasional annual expenses. You should budget for those before you allot funds for entertainment.

"As a society, we tend to go about it a little backwards," Kahler says. "Fixed expenses, lifestyle, and then we'll see if there's anything left for the future."

Don't freeze

Another area where people face problems taking control: their investments, especially given the gut-wrenching rout the stock market has suffered. Some people are frozen as if caught in the headlights.

In fact, 55% of 589 investors polled by Fidelity in October said they weren't looking at their investments in this volatile market. Some may feel confident about their investment plans -- but no doubt others are afraid to look.

Obviously, we can't control market performance or volatility. And how you approach investing now will depend on your outlook and your nerves: Some see this as a buying opportunity, with the stocks of healthy companies on sale. Others see this as the time to sit out of the market.

Whatever's right for you, make sure you focus on what you can control: Invest in a way that suits your risk tolerance and, in these volatile times, keep an eye on your asset allocation. Also, check your investment expenses and consider switching into low-cost index funds.

David Hefty, a certified financial planner, said some of his new clients are frozen by the bad news lately. "We describe it as financial paralysis," said Hefty, chief executive of Cornerstone Wealth Management in Auburn, Ind. "It really creates the inability to make wise decisions during this time."

If you're feeling stuck, avoid 24/7 news. "You'll go insane watching the news broadcasts, trying to keep up with what's going on in the market," said Sheryl Garrett, founder of the investment advisory service Garrett Planning Network. "If it makes you at all nervous, turn it off. It's not going to change anything, whatever happens."

Then assess your asset allocation. "With the market as volatile as it's been, it's one of those things you might need to do every month or two or three," Garrett said. "If someone hasn't reviewed their asset allocation in the last three months, they need to." If you're not sure what to do, consider meeting with a fee-only financial planner to chart your course.

Taking control will feel better than ignoring the situation. "Once people go through that process, they look at their situation -- not national averages, not what they read or see -- they look at their situation, it's a very calming effect," Hefty said. "It helps take away that fear. You can see it in their faces -- even the ones that have to make changes feel so much better about their situation."

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